Memorandum of Decision Re: Novation

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re JOSEPH and CHRISTINE LONGO,                                       No. 99-10874      Debtor(s). ______________________________________/ BRUNO C. PAGENDARM, et al.,      Plaintiff(s),    v.                                                                              A.P. No. 99-1170 JOSEPH and CHRISTINE LONGO,      Defendant(s). _______________________________________/
Memorandum of Decision
     According to the amended complaint in this adversary proceeding, in 1997 plaintiffs Bruno and Janet Pagendarm agreed to exchange personal residences with debtors and defendants Joseph and Christine Longo. As part of the agreement, the Longos were to build an additional home for the Pagendarms for $75,000.00. After escrow closed, the Pagendarms changed their minds about paying the Longos to construct the home and requested return of their $75,000.00, which they thought was still in escrow. They then learned that the money had been paid over to the Longos, who had spent it. The Longos promised to repay the money.      The complaint further alleges that the Pagendarms filed a lawsuit against the Longos in October, 1998; that the parties entered into a settlement agreement; and that one day before the settlement became a judgment the Longos filed a Chapter 7 bankruptcy petition.      The Pagendarms take the position that they have stated claims under Bankruptcy Code sections 523(a)(2)[fraud], 523(a)(4)[embezzlement] and 523(a)(6)["attempted conversion"]. The Longos have filed a motion to dismiss, primarily based on the settlement agreement. For the reasons stated below, the court treats the motion as one for summary judgment and will grant the motion.      The complaint is certainly defective in that it fails to allege that the Longos failed to obtain the $75,000.00 by any wrongful means. Without an express trust, the Longos cannot be held liable for defalcation pursuant to § 523(a)(4). In re Pedrazzini, 644 F.2d 756, 758 (9th Cir. 1981). Without some sort of intentionally malicious conduct, they cannot be liable pursuant to § 523(a)(6). Kawaauhau v. Geiger, 523 U.S. 57 (1998). The fraud allegations seem based only on the Longos' alleged promise to repay, not any fraud in obtaining the funds. The equivocation evident in the complaint makes it doubtful the Pagendarms ever had a meritorious case for nondischargeability.      Nonetheless, it is the settlement agreement which compels dismissal of this adversary proceeding with prejudice. It is as comprehensive as can be imagined, and contains language virtually identical to the settlement agreement considered in In re Fischer, 116 F.3d 388 (9th Cir. 1997). In that case, the court ruled that the settlement agreement was a novation which barred a nondischargeability complaint based on any prior conduct.      The Pagendarms argue that the court should not follow Fischer for two reasons. First, they argue that Fischer is distinguishable because in that case there was at least partial performance by the debtors. Second, they argue that they can rescind the settlement agreement. The court sees no merit in either position.      There was substantial nonperformance in Fisher, yet the court still found that the settlement agreement was an effective novation. Similarly, there was only nominal performance in Gonder v. Kelley, 372 F.2d 94 (9th Cir. 1967), cited in Fischer as controlling authority. There does not seem to be any basis in the law for differentiating between cases where there was only a few payments made from those cases in which no payment was made. Both Fischer and Gonder stand for the principle that when a complete settlement is reached in consideration for a promise to pay in the future, the failure of one party to make the promised payments does not turn the settlement into a nullity. Rather, the settlement agreement is a novation which replaces all of the prior obligations.      For the same reason, the settlement agreement is not subject to rescission for failure of the debtor to make the payments. It is a simple matter to draft a settlement agreement which is only effective on payment. Where the parties instead have agreed that "By executing this agreement, each of the parties intend to and do hereby extinguish the obligations heretofore existing between them and arising from that dispute," there is no basis for rescinding the agreement after execution.      The complaint hardly paints a compelling picture of dishonest conduct on the part of the Longos. However, their pre-settlement conduct is irrelevant because any and all prior claims were extinguished upon execution of the settlement agreement. Plaintiffs will therefore take nothing by their complaint, which will be dismissed with prejudice. Counsel for the Longos shall submit an appropriate form of order granting summary judgment and an appropriate form of judgment. The Longos shall recover any costs of suit.
Dated: November 4, 1999                                                                               ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy